The alarm comes as banks are trading just a fraction below record valuations after steady gains over the past three months. The S&P/ASX 200 Banks Index closed at 8559.34 points, just shy of its 8581.54 points record set April 30.

Fund managers are not concerned about the asset quality of bank loan books, which suggests they don’t think a housing bubble is brewing. That has not stopped regulators, including the RBA, from alluding to the risk of a property price bubble in key housing markets such as Sydney.

Solid business of banking

WaveStone Capital portfolio manager
Catherine Allfrey
doesn’t believe Australia has a housing bubble on its hands but said that high levels of investor buying, for example, could point to the emergence of one in future.

“The problem is that when you’ve got low interest rates, housing has to pick up. Prices have to move before first home buyers or second home buyers [are inclined to] construct, which is clearly what the Reserve Bank wants to stimulate," she said. “I’m not really in the camp where we’ve seen a housing bubble yet . . . I just don’t think that it’s enough."

Fidelity Investments head of equities
Paul Taylor
said that banking remains an attractive industry in Australia and banks have proven their valuations through superior fundamentals.

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“I’d look at them as solid businesses with good management teams, all the things you look for but it’s not an overly cheap valuation so you wouldn’t have huge upside," he said.

“Yields are still pretty good and with interest rates still coming down, people are heading there. I can certainly understand why people are heading there because you’re getting a better fully-franked yield . . . no growth, but you don’t need a lot of growth to justify the investment.

“Having said all that, within my portfolio I still think they’re an important foundation but they’re up 35 [per cent] to 45 per cent in the last year. I don’t think they’re hugely cheap either, I wouldn’t be having a huge overweight on the banks but they’re solid investments and I understand why."

Banks playing down fears

Banks have achieved double the returns of the S&P/ASX 200 in 2013, up 25 per cent versus 13 per cent for the benchmark. Within the banking sector
Bank of Queensland
has outperformed its peers, up 47 per cent, followed by
National Australia Bank
up 41 per cent.
Commonwealth Bank of Australia
is the laggard with share price gains of 17 per cent.

Ms Allfrey agreed that banks were expensive on a price-to-book or price-to-earnings ratio measure. “We’ve had the yield bubble. Are we going from the yield bubble to the housing bubble? That is the question, but I don’t think it’s a housing bubble yet."

Banks have sought to play down fears of a property bubble and cite the fact that the average borrower is ahead on mortgage repayments as an example of how resilient their loan books are to housing market distress.

In New Zealand, where that country’s Reserve Bank has expressed more serious concerns around a housing bubble, macro-prudential tools are being ushered in to restrict how much finance borrowers can access with tighter loan-to-value ratios.

Some key figures in the Australian market are open to macro-prudential regulation but no such plans are underfoot.